Collateral Damage on the Front Lines of the Trade War

In a trade war, tariffs are an imprecise weapon. While the effects of the US-China trade war will be widely felt, the collateral damage to American multinational corporations (MNCs) in China will be particularly devastating. I spent the summer interning at an American company in Beijing and witnessed firsthand how the consequences of American trade policy are more complicated and far-reaching than is commonly recognized. Like waves from a collapsing ice sheet, the ramifications of U.S. tariffs radiate far beyond the point of impact.

First wave: American Tariffs on China

The Trump administration’s justification for the trade war is relatively simple: higher tariffs on Chinese goods will put pressure on China to adopt fairer trade practices. Yet these tariffs also threaten American firms whose complex production networks span the globe. Because modern production processes are so segmented – with countless exports and imports of intermediate goods before assembly of a final product – it is no longer so easy to distinguish a Chinese product from an American one.

An iPhone, for example, is designed in the United States, built from components manufactured in Asia and Europe, and finally assembled in China by Foxconn, a Taiwanese company. If the trade war continues to grow, an Apple iPhone would be taxed just as much as a Huawei P20, regardless of the fact that Apple is an American company.

The current administration is perfectly aware of the toll its policies are taking on American MNCs – in fact, they’re counting on it. From the administration’s perspective, not only is China stealing American jobs, but American companies themselves are sending jobs to China.

Yet this view muddles the facts: in our iPhone example, China’s role as a low-value assembler earns the country only $8.50 in added value out of a total wholesale cost of $240 per iPhone. Meanwhile, Apple employs 47,000 Americans and supports hundreds of thousands of jobs in other American industries. Apple has successfully lobbied to keep most of its products off the tariff list so far – but my company was not so lucky.

Like the iPhone, my company’s high-tech medical devices contain key components designed and produced in the U.S. Most of the devices’ value comes from these core pieces. But U.S. Customs taxes the full value of imported goods, rather than the value added from assembly in China. The devices are taxed as Chinese goods upon entry into the United States even though a sizable portion of the product’s value originated in the U.S.

Second wave: Chinese Retaliation

While the manufacturing aspects of an American company’s China operations usually garner the most attention, the growing Chinese domestic market is an important draw for American firms. Chinese customers have a taste for foreign goods and are enjoying rising income levels, raising the stakes for MNCs competing with domestic corporations for market share. Chinese hospitals can now afford the high-technology radiotherapy machines American companies produce, and brands like Starbucks and KFC are flourishing in China, where their products are afforded a luxury status they lack in the US.

China has replied in kind to each new schedule of American tariffs. Yet China does not import enough American goods to match American tariffs tit-for-tat, so it may use other non-tariff measures to inflict economic pain on the U.S. The easiest targets are American companies based in China – some companies have recently reported having their shipments into China held up at the border or subjugated to unnecessarily long inspections. Other possible approaches include licensing refusals and increased tax audits.

China’s propaganda apparatus also has the capacity to turn the Chinese public against foreign brands, a technique it used in 2017 against Korean grocery store Lotte over Korea’s deployment of THAAD missiles. Lotte has since moved to abandon operations in China due to government pressure. While there isn’t yet any evidence of similar measures against American firms, it’s unclear just how resilient the reputations of American companies would be in the case of a protracted trade war.

Not only do retaliatory tariffs affect American firms selling goods to China, but it also results in some American companies being “doubly-tariffed” – paying Chinese taxes on inputs and U.S. taxes on final goods, or vice-versa. The American company I worked for in Beijing is one such case. The firm produces and sells high-tech oncology machines in the U.S. and China. The company ships high-value core components from the U.S. to China (tariffed!), where they are combined with Chinese parts and assembled for shipment back to the U.S. (tariffed again!). These waves of tariffs and counter-tariffs threaten to engulf the very companies that the U.S. economy needs to remain globally competitive.

Third wave: Long-term Competitiveness Suffers

In response to the deteriorating trade environment, China has doubled-down on the theme of economic self-reliance. China has accelerated the implementation of exclusionary regulations and industrial policies focused on breaking American dominance in key tech industries, following the guidance of the State Council’s “Made in China 2025” initiative. Chinese employees at my company said that the government only tolerated the company’s presence out of necessity; they couldn’t yet replicate the proprietary core technologies produced by the company’s U.S. branch. The employees could even pinpoint the fast-growing domestic competitor that might one day usurp the company’s market share with the help of government subsidies. The trade dispute with the U.S. has attuned China to the dangers of being reliant on American products, which has led them to further support their companies in an attempt to out-compete ours.

American companies won’t just lose out to Chinese companies, but to their global competitors as well. In China, consumers will pivot towards products from European or Asian companies whose prices aren’t increased as a result of trade war tariffs. In the global market, American MNCs exposed to tariffs in their production network will face higher costs and stiffer competition.

Rethinking our objectives   

While U.S. tariff policy is meant to target Chinese companies exporting to the U.S., it also ensnares American companies operating in China. On top of the tariffs themselves, global American companies suffer from their ripple effects: countervailing Chinese tariffs and increasingly unfavorable Chinese domestic regulations.

The current American approach to trade war negotiations pays too little heed to the burden born by American MNCs. In its fixation on trade imbalances, the administration has lost sight of what truly determines commercial primacy: the ability of American companies to retain their technological and reputational edge over global competitors. American tariff policies are shrinking American leadership in both areas and incentivizing China to replace American firms rather than do business with them. The Trump administration must consider the incidental economic damage to American companies, or America’s global economic competitiveness will be the ultimate victim of the trade war.


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Bailey Marsheck

Bailey Marsheck is a Yenching Scholar pursuing a Masters of Law in Politics and IR at the Yenching Academy of Peking University. He holds an undergraduate degree from UC San Diego, majoring in International Studies-Economics and minoring in Chinese Studies. Bailey intends to enter the field of empirical political science pertaining to China. He is an avid observer of U.S.-China relations.

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